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Cover Up! 3 Currency Risks Every Small Business Exporter Must Consider
September 20, 2016 Suhail Karim Beg, Business Development Specialist, Office of Small Business

When you ink the contract with that new buyer in a foreign country, who takes the currency risk? Should it be the buyer, the bank or you? The answer will depend on the currency of exchange, your account terms and the strength of your negotiating position. A strong dollar could mean you losing out on business unless you can extend credit terms and possibly financing. Maybe it’s a 50/50 split between you and the buyer. Possibly your product and the “Made in America” brand are just too good to resist and you can demand U.S. Dollars or another hard currency.

Exchange rate differentials between the time of sale and payment represent currency risks that could result in financial loss. Just because the sale was dollar denominated does not mean you have covered every aspect of currency risk open to you. What if government actions prevent the convertibility or repatriation of funds transfers in the currency of your sale? This is not a commercial risk: it’s political. 

Currency risks can be broken down into three types:

  • Inconvertibility risk
  • Repatriation risk
  • Exchange Rate risk

The inability of the buyer to convert local currency into U.S. Dollars or another hard currency when it comes time to make payment can come about due to restrictive government exchange rate regulations. Similarly, the government may also prevent the transfer of hard currencies out of the country, especially during times of economic crisis affecting a country’s hard currency reserves. It is important to note that inconvertibility risk is separate from exchange rate risk, the risk that the currency of payment might depreciate or be devalued raising the costs to your buyer and possibly their ability to pay. Foreign exchange rate risk is not covered as part of an export credit insurance policy.

Are You Covered?

A small business exporter may obtain export credit insurance offering comprehensive coverage against political and commercial risks (i.e., buyer specific risks of non-payment) from a variety of private sector sources. Consult your banker for a broker reference or check out this list of broker dealers.  

If you accept payment in local currency then you must consider how you will protect yourself if the currency depreciates against the dollar. Your banker may offer exchange rate risk cover, either directly or via third parties. However, sometimes your banker is unable to offer export credit cover in a particular country or they may have already met their country limits. Where do you go to get protection against political and commercial risks?

Do It Yourself?

You already engage in prudent credit management, which is why you run thorough due diligence credit checks on all your buyers. Sure, you could evaluate country risks yourself and then determine if export credit insurance is needed. But you know you have better things to do with your time. Worrying about the precipitous drop in commodity prices affecting economic conditions, political turmoil, civil war and unrest doesn’t help you run your business any better.

Your “Official” Export Credit Agency

Don’t worry, we’ve got you covered. If you are unable to receive terms from your banker then contact a trade finance specialist at your official export credit agency of the United States: EXIM Bank. We offer a variety of trade credit insurance products, guarantees and direct financing that empower your trade. No transaction is too small. With our Express Insurance, you don’t even have to pay for the credit report— we take care of that. Easily compare all our insurance products’ premiums, fees, credit limits, coverage amounts and reporting requirements. Find the one that’s right for you. With the full-faith and credit backing of the United States we can protect you against non-payment and expand your loan collateral. You can free up your cash flow to support your business and offer extended credit terms of up to 180 days on open account. Expand your sales and penetrate new markets safely. We keep tabs on the political and commercial conditions of your buyer and their country.

There are many export credit agencies around the world but only one is yours. Call us to find out how we can help you export safely.

Get a Free Export Finance Consultation Today!